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IRS Helps You Out When Your Boss Doesn’t Pay You Back For Expenses Related to Your Job

Apr 3rd, 2012
by jblankenship.
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Employee Transfer
Employee Transfer (Photo credit: Wikipedia)

When you have to pay for certain expenses in order to do your job, sometimes (if you’ve got a good employer!) your company will reimburse you for those expenses.  On the other hand, sometimes they don’t reimburse you for those expenses.  Did you know that you can deduct those expenses (to a certain extent) from your income when you file your tax return?  And in some cases, when your employer reimburses you, you still need to fill out additional tax forms in order to keep from being taxed on the reimbursements.

The IRS recently published their Tax Tip 2012-54, which details how to go about deducting these expenses, and what expenses are qualified for deduction.  Below is the text of the Tax Tip in its entirety.

Employee Business Expenses

Some employees may be able to deduct certain work-related expenses.  The following facts from the IRS can help you determine which expenses are deductible as an employee business expense.  You must be itemizing deductions on IRS Schedule A to qualify.

Expenses that qualify for an itemized deduction generally include:

  • Business travel away from home
  • Business use of your car
  • Business meals and entertainment
  • Travel
  • Use of your home
  • Education
  • Supplies
  • Tools
  • Miscellaneous expenses

You must keep records to prove the business expenses you deduct.  For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.

An accountable plan must meet three requirements:

  1. You must have paid or incurred expenses that are deductible while performing services as an employee.
  2. You must adequately account to your employer for these expenses within a reasonable time period.
  3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2.  You must report the income and itemize your deductions to deduct these expenses.

Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040.  Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.

For more information see IRS Publication 529, Miscellaneous Deductions, which is available on the IRS website at www.irs.gov, or by calling 10800-TAX-FORM (800-829-3676).

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Book Review: The Wall Street MBA

Apr 2nd, 2012
by jblankenship.
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This book, by Mr. Reuben Advani, sets out to cover much of the pertinent information required in an MBA program within its pages, and I think it does a good job of meeting this goal.  Mind you, I don’t have an MBA degree so I can’t say with certainty that the goal is accomplished, but I’d have to say that the book does an excellent job of hitting all of the important points of required knowledge, specifically as it relates to investing and individual company valuation.  I liked this book, but then again I’m kind of an out-of-the-ordinary accounting/investing geek.

Where I have some confusion with this book is in understanding who is the target audience.  The problem is that the subject matter gets pretty involved in accounting principles that can be overwhelming to the average individual – potentially so much that the average individual may lose interest.  On the other hand, if an individual is a professional who already understands these concepts well enough to follow the book, then that individual probably doesn’t need this book, except as a refresher.

Perhaps the mid-point between a novice and a professional is the target audience.  Someone who has a passing understanding of accounting and investing principles, but who needs a more in-depth explanation of how the principles interact to help with investing activities.

Mr. Advani starts off with a comprehensive overview of basic accounting, which can be helpful if you’ve never had an accounting course or if you need a review.  Mingled in with this overview is an example company, which helps to understand the principles as they are explained.  After that, Advani reviews how this knowledge of accounting can be used to help you understand the relative health of a company as you consider it for investment.  Again, this is good information to know, but I’m not positive that it would be all that useful to the average investor.

One problem that the average investor has when encountering this information is the supposition that knowing how to understand the value of a company is going to somehow make investing in individual companies something of an exact science.  Anyone who has spent much time considering investments, whether as a professional or as an individual investor, can attest to the fact that investing is far from an exact science.

Any number of bad things can happen to an otherwise healthy company – whether it is a downturn in the sales cycle, corruption in the boardroom, labor strife, or the overall economy causing issues.  No matter how much effort is put into reviewing the accounting and valuation of a company, these and may other possible uncontrollable things can cause problems for the company.  It is for this reason alone, the single company’s exposure to risks, that the average investor is not well-served by individual company investing.

Having said all that though, I still believe that this book is a very good resource for the individual who finds him- or herself in a position of reviewing company’s annual report for whatever reason.  I think Advani does a good job of explaining all of these principles in a format that is understandable to the person with little background with this sort of review.  In particular I liked the final couple of chapters, where Mr. Advani gives a rundown of the principles of investing in currencies, real estate, and commodities – areas that often don’t get much attention in explanation.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

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About to Graduate? Learn How to Save!

Mar 27th, 2012
by jblankenship.
4 comments

Hey, soon-to-be-graduates: as you begin to make your way out into the world of full-time employment, you’ll soon be faced with many, many “grown up” ways to spend the money you’ll be earning.  You’ll of course have rent, insurance, food and clothing, maybe a car payment, and you’ll want to use some of that new-found money to blow off steam, however you choose to do that – maybe fulfilling a lifetime dream of getting “beaked” by Fredbird, for example.

If you’re on top of your game, you’ll may also be thinking about saving some of your earnings.  Here, you’ll have a bundle of options to choose from – regular “bank” savings accounts, 401(k) plan (or something similar) from your employer, and IRA accounts, both the traditional deductible kind and the Roth kind (hint: the Roth kind is what I want you to pay particular attention to).

Side note: even if you’re not actively thinking of saving money at this stage, chances are you’ll begin thinking about savings activities soon, and definitely at some point in the next 40 years, since saving toward retirement is pretty much YOUR own responsibility.  In the next few years you’re going to be thinking about buying a home, possibly marriage and a family, and other longer-term kinds of things that require significant amounts of money. If you start on the savings process and get it into your mindset early, you’ll be miles ahead of your peers, and you’ll probably have built up a significant savings by the time you’re ready for these goals.

As you think about savings activities and all of these types of savings accounts, it’s important to gather knowledge about the features and benefits of the various accounts and how this will play into deciding what’s the best place to put your savings.

Emergency Savings

Briefly reviewing the accounts I listed, you might start with a regular savings account at a bank.  You probably have a checking account of some type, so you can open a savings account at that same institution as well.  This account could be used for developing an emergency fund.  This is so that, when you need new tires for your car, or you need to put down a deposit on a new apartment, you’ll be able to use these funds for that purpose, rather than using a credit card or otherwise going into debt.

Another very good reason to have an emergency fund is to help you get by if you should happen to find yourself unemployed.  I’d suggest putting enough into your emergency fund to cover your monthly expenses for at least 3 months.  If you’re conservative you might put as much as a year’s worth of expenses into the account – in either case, maintain that level over time, in tandem with your other savings activities.  This saving can be done automatically, via automatic transfer from your checking account, for example.  By automatically saving, you won’t have to *decide* if you’re going to save – it will happen without you having to make a decision.

There are no significant tax benefits with a savings account, so your saving activities should include some of the other plans that you have available.

Retirement Saving – 401(k)

Next, once you’ve begun your emergency fund, you should begin thinking about longer-term saving.  If you have a 401(k) plan available via your employer (or a comparable plan, such as a 403(b) or a 457 plan), you should consider taking advantage of this.  This is especially true if your employer offers a “matching” program – where the employer will put money into the account as you put money into it.  Often this matching is done either on a dollar-for-dollar basis up to a certain percent, or on a percentage of contributions.

For example, the company might match your contributions dollar-for-dollar up to 3% of your salary – meaning that if you put 1% of your salary into the account, the company will also put 1% into the account on your behalf.  You can put as much as 3% (for this example) into the account and the company will match it.  You will be eligible to put more in the account than what the company matches, but at this stage you might want to limit it to matched amount (more on this in a bit).

The other example that I gave is where the company matches on a percentage basis – this might be expressed as 50% matching up to a 6% employee contribution.  If this was the case, when you put in 1%, the company would match your contribution with a .5% contribution.  If you put in 4%, the company would match it with 2%, and so on, up to a 3% match for your 6% contribution.

The benefit of this kind of account is that, as you contribute money to the account, it’s taken out of your paycheck PRIOR to income tax, which will then reduce your taxable income for the year.  The money in the account (including the employer matches, which you’re also not taxed on in the current year) is then invested, hopefully growing over time.  The growth in the account is likewise untaxed, until you take the money out of the account.  At that time, you’ll pay ordinary income tax on the money that you take out of the account.

The downside to this kind of account is that, generally, the money that you put into the account is more or less locked up until you reach age 59½.  While there are ways to get at the money before that point, the real purpose of this account is to save toward retirement, so any money you put into your 401(k) plan should be considered very long-range savings.

Retirement – Traditional IRA

If you don’t happen to have a 401(k) plan available at your employer, another option to consider for longer-range saving is the Traditional IRA.  The way this works is that you open the IRA account and put up to $5,000 (and when you are over age 50, you can put an additional $1,000) into the account each year. Then, when you file your income tax return for the year, you are eligible to deduct that contribution amount from your income (subject to limits).

After that, the Traditional IRA acts pretty much like the 401(k) plan described before: your savings (hopefully) grows via investments and no tax is owed until you take the money out of the account – usually at age 59½ or later.  At that time you’ll pay ordinary income tax on the money as you withdraw it.  As with the 401(k) you *could* take the money out earlier, but generally there would be penalties for doing so.  As such, the Traditional IRA should be for your longer-term savings.

Retirement and other goals – Roth IRA

FINALLY – we’ve gotten to the account that I brought you here to talk about: the Roth IRA.

A Roth IRA is a little bit like the savings account, in that it doesn’t present any tax savings for you as you put money into it (like the Traditional IRA or the 401(k) plan does).  However, the real tax benefit comes as your account grows over time – when you take the money out after age 59½, there is no ordinary income tax owed on any of the money that you withdraw!

This is a big deal.  You can put in as much as $5,000 per year (same as the Traditional IRA), and as that money grows over time, you won’t have to pay tax on it if you leave it in the account until age 59½.  If you started saving $5,000 per year in a Roth account at age 22 and continued this until you were 42, I’ve illustrated how this could eventually become $33 million over time.

Possibly even a bigger deal is that you can use the Roth IRA as a sort of emergency fund, in addition to a retirement fund.  The money that you’ve contributed to the Roth IRA over time can be withdrawn at any time for any purpose, without tax or penalty.  The investment growth is restricted (like the other retirement accounts mentioned above, to age 59½ or older), but the money you contribute is unrestricted!  This could give you that extra amount that you need for a down-payment on a home, for example.

It’s best to be very judicious in your use of this privilege, since the account is primarily for retirement – but it’s nice to know that you have this option available.

Conclusion

Let’s say that you have started a new job making $30,000 a year.  After taxes are taken out, you have something on the order of $1,800 left each month.  Taking care of rent, insurance, car payment, and all the other things you have to pay (don’t forget the “beaking”!), leaves you with $200 a month for saving.

Let’s say you earmark $50 for your emergency savings.  Then, your employer provides a 3% matching plan for your 401(k), which amounts to $75 per month.  Keeping things simple, let’s say that this leaves you with $75 for other savings activities.  A Roth IRA is an excellent place to put this additional money.

The reason that a Roth IRA is the preferred place to put your excess savings money is because of the tax rate that you’re in at the present.  The savings in tax would be something on the order of $11.25 if you put this additional $75 into a Traditional IRA or a 401(k) plan, and then you’d have your money locked up until retirement. Since you’re already (rightly) taking advantage of the 401(k) plan (and doubling your money via the employer match), using the Roth IRA provides you with an additional way to save with a diversified tax treatment.

All in all, the Roth IRA presents you with a very cost-effective way to save money over time, especially when you’re at the lower end of the tax brackets.

If you’re needing a few more reasons to go with the Roth IRA, try this: if you’re going to grad school, your contributions in your Roth IRA account could be used to help pay for school, but at the same time – retirement accounts in general are not included as sources when calculating financial aid.  Plus, as you make contributions to a Roth IRA (also to other retirement accounts), depending on your income level you may be eligible for the Saver’s Credit.  This is up to a 50% tax credit for your contributions to a retirement plan, including the Roth IRA.

Full Disclosure: That’s my daughter Emma being “beaked” by Fredbird.  She’s a soon-to-be graduate of Western Illinois University, Class of ’12, and proud owner of a Roth IRA.

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The SEP IRA Explained

Mar 21st, 2012
by jblankenship.
2 comments
social responsibility of business
(Photo credit: ocean.flynn)

One of the more unique types of retirement accounts is the Simplified Employee Pension IRA, or SEP IRA for short.  This plan is designed for self-employed folks, as well as for small businesses of all tax organization, whether a corporation (S corp or C corp), sole proprietorship, LLC, LLP, or partnership.

The primary benefit of this plan is that it’s simplified (as the name implies) and very little expense or paperwork is involved in the setup and administration of the plan.  The SEP becomes less beneficial when more employees are added, and there are some additional options available in other plans (such as a 401(k)) that may be more desirable to the business owner.

SEP IRAs have a completely different set of contribution limits from the other kinds of IRAs and retirement plans.  For example, in 2012, you can contribute up to $50,000 to a SEP IRA. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business.

The account for each participant is an IRA, just like any other IRA (other than the contribution limits mentioned above).  You’re allowed to invest in any valid investment security, rollover the plan (upon termination of employment) and direct the plan to your heirs however you wish.

Money contributed to the plan is not taxed to the employee/participant upon contribution, and any growth in the account is tax-deferred until distribution.  At the distribution of the funds, the money will be taxed as ordinary income.  Upon reaching age 59½ you can access the funds without penalty – otherwise, unless you meet one of the early distribution exceptions, there is a 10% penalty imposed in addition to the income tax on the distribution.  At age 70½ you will be required to begin taking minimum distributions from the account, just like any other IRA.

Additionally, a SEP IRA can be established up to the filing date for your business entity – as late as April 15 of the following year if you like.  This is different from a 401(k), for example, which must be established during the tax year.

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Smoke, Mirrors, and Alphabet Soup

Mar 19th, 2012
by jblankenship.
7 comments
A bowl of alphabet soup nearly full, and nearl...

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In an environment of Ponzi schemes and financial scandals many Americans have lost trust and confidence in the financial profession; seems like there are some financial advisers that have been helping themselves, more than their clients. To fight back against this trend of lost trust and skepticism, advisors are being more creative with credentials, some of which can be earned with minimal or no study and can be bought with a couple hundred dollars. A quick look at the Financial Industry Regulatory Authority’s web site (FINRA) (http://apps.finra.org/DataDirectory/1/prodesignations.aspx) shows over one hundred and twenty different credentials being used by advisors to build creditability and trust.  I’m sure there are many more not tracked by FINRA.

Professional certifications arose decades ago as a way for people in various industries to identify qualified practitioners. It’s always good to know that our doctor has an MD or our account is a CPA. In the financial realm, many well-established credentials, including the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP®) designations, require long study, demand continuing education and enforce strict codes of ethics. In order to become a CFP®, for example, one must meet the following requirements:

1)      A bachelor’s degree or higher from an accredited college or university

2)      Three years of full time financial planning experience

3)      Complete a CFP® board registered program or hold one of the following

  • CPA
  • ChFC
  • Chartered Life Underwriter (CLU)
  • CFA
  • Ph.D. in business or economics
  • Doctor of Business Administration
  • Attorney’s License

4)      Successfully complete the 10 hour CFP® certification exam

5)      Complete 30 hours of continuing education every two years.

Increasingly, I suspect, financial advisers are using dubious designations as marketing tools to win back the trust of older, wealthier clients.  Some of the more popular are those that use the term “senior” in their name. Some examples are: certified senior adviser, certified senior consultant, certified senior specialist, certified senior financial planner, chartered senior financial planner and chartered adviser for senior living. I get confused when hearing all the “senior” designations and am left wondering, do the advisors who hold these, really have any special education or experience working with seniors, or do they just want you to think they do?

To confound the issue even more many designations sound similar (and I think this is intentional) for example, the certified retirement financial adviser, or CRFA, sounds similar to the CFA designation. But the CFA requires roughly 900 hours of study in accounting, economics, ethics, finance and mathematics, and only 42% of candidates pass its three required exams, a process that can take several years. The CRFA, by contrast, requires that students pass one exam consisting of 100 multiple-choice questions, for which 40 to 75 hours of preparation is typically sufficient preparation.

In much the same way, the CSFP, or chartered senior financial planner, credential could be confused with the certified financial planner, or CFP®, designation. The CFP®, established in 1972, requires that students pass the equivalent of 15 credit hours of college-level courses, culminating in 10 hours of exams. The CSFP, launched in 2003, requires a three-day review course and the passing of one two- to three-hour exam.

Over the last few years the term “Wealth Management” has become popular with advisors as a way to attract wealthier clients.  It didn’t take long for a list of wealth management designations to appear.

  • WMS – Wealth Management Specialist
  • CWC – Certified Wealth Consultant
  • CWS – Certified Wealth Strategist
  • AWMA – Accredited Wealth Management Advisor
  • CWM – Chartered Wealth Manager
  • CWPP – Certified Wealth Preservation Planner

While some of these designations may be good for consumers by giving their advisor specific knowledge and experience, many will turn out to be marketing gimmicks employed by advisor to attract wealthier clients.

Credentials are used because they help advisers make more money. A 2007 study by FINRA’s educational foundation determined that 46% of older investors were more likely to accept financial guidance from someone with a professional designation – and 17% of investors would be more receptive to advice from a “certified adviser for senior investing,” even though such a credential doesn’t exist.

Buyers beware when it comes to initials behind someone’s name. According to the American Academy of Financial Management, based in New Orleans, the things to look for are these: accredited degrees, licenses, or master’s degrees from government-recognized or accredited programs or educational institutions with concentrations in Finance, Investments, Securities, Economics, or Accounting. These requirements make individuals eligible for Professional Designation. You can also check out designations yourself by calling the issuing organization and finding out what the requirements are – you might be surprised by what you find.
Steven Young, CFP® (XZ$, LMNOP, EIEIO)

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Early Social Security Filing Examples

Mar 16th, 2012
by jblankenship.
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BATH, ENGLAND
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Most of the examples that you see indicate that filing for Social Security benefits as late as possible is the best way to go.  However, this is not always the case, given that you’re receiving the benefit (albeit at a reduced rate) for a longer period of time.  Let’s work through some examples to show how this works.  This article will only deal with single individuals – we’ve covered spouse benefits in several other articles, it’s time to provide some guidance for single folks.

Example 1, Filing at 62 vs 66

John is single, age 62, and his benefit at Full Retirement Age (FRA) has been estimated at $2,000, so his benefit at age 62 would be $1,400, or 70% of the amount at FRA.  If he takes the benefit now, he’ll receive $16,800 per year for the next four years. (COLAs have been eliminated in this example to keep it less confusing.)

If he is in a position where he doesn’t necessarily need the money, he could invest the funds as he receives them.  If he invested those funds at a 5% fixed rate, when he reaches age 66 he’ll have a total of approximately $74,220.  He’ll also continue to receive the same $16,800 year-after-year.

Now, let’s assume at this age that John needs the $2,000 for living expenses.  If he uses the current $1,400 of Social Security benefits and supplements it with his “stash” he’s built up over the previous four years, letting the remainder grow at interest, it will take fourteen years before he’s run out of the stash account.

The problem is, once John has done that now, he’ll be stuck with an income that is $600 less (in today’s dollars) than what he needs.  If he has no other resources, such as a 401(k), pension, or IRA, he’s in a pickle.

If John was somehow able to generate 7% from his savings, he’ll buy himself another four to five years, but that’s really it.

Example 2, Filing at age 62 vs 70

Same facts as Example 1, but now we’ll compare the outcome if John is able to hold off to age 70, at which point his benefit would be increased to $2,640.

Running the numbers again, upon reaching age 70, John’s savings account at 5% will have grown to approximately $164,837.  Now, if John’s income requirement is still only $2,000 per month, his side account generates enough interest (at 5%) to sustain over time without depleting it. (This assumes that he is financially in a position to delay, using other sources to cover his expenses up to age 70.)

However, if John had delayed receiving his benefit to age 70 and then began using $2,000 for expenses and banking the rest in the same type of savings account, he’d still have more money in the account if he started early benefits – for fifteen years, to his age 85.  From that point forward, it would be more beneficial to have waited to age 70.

Example 3, Filing at age 66 vs 70

Again, same facts, but John waits to file at Full Retirement Age (FRA), age 66, and puts the full amount of his benefit in the same savings account at 5% interest.  Now, when he reaches age 70, the savings account has grown to more than $106,000.

He still only needs $2,000 to live on – and when compared to delaying up to age 70, since he is able to save a portion of the larger, full benefit, he is able to build up his savings account, but the “wait ‘til 70” account doesn’t become larger than the “file at 66” account until he reaches more than 93 years of age!

Conclusion

In these examples, which I’ll admit are far from comprehensive, we can see that longevity makes all the difference.  If you live a very long life, it makes more sense to delay, assuming you can cover your expense needs in the meantime.

In many cases though, the individual cannot wait, needing the money earlier.  In addition, most folks take a view that they’ll not likely live to the age needed in order to make the delay option pay off.  So – all things considered, it might be better for you to file earlier, as always, depending upon your circumstances.

Leave your own situations in the comments section below (not too complicated though!), and I’ll gather some of the more common situations and show how some tactics might play out at differing filing ages.

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What types of accounts can I rollover into?

Mar 14th, 2012
by jblankenship.
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OMG IRA
OMG IRA (Photo credit: girlonaglide)

When you have money in several accounts and you’d like to have that money consolidated in one place, the question comes up – Which type of account can be tax-free rolled over into which other type of accounts?

Thankfully, the IRS has provided a simple matrix to help with this question. At this link you’ll find the matrix, sourced from IRS Publication 590.

In terms of explanation, here are a few rules to remember:

You can generally rollover one account of any variety (IRA, Roth IRA, 401(k), and so on) into another account of the exact same type.

You can rollover a Traditional IRA into just about any other tax-deferral plan, including 401(k), 403(b), 457(b), as well as a SEP IRA.  The same goes for each of the accounts in reverse as well as between all of these types of accounts.  In general, employer plans such as 401(k), 403(b) and 457(b) plans are not eligible to rollover until the employee has left the job.

You can also rollover any of these accounts into a Roth IRA – but you’ll have to pay tax on the rollover amount.  This is known as a Roth Conversion.

A SIMPLE IRA generally cannot accept a rollover of any other type of account (other than another SIMPLE IRA) into the account.  On the other hand, a SIMPLE IRA can be rolled over into any of the other tax-deferred plans – IRA, 401(k), 403(b), 457(b) or SEP IRA – but only after the SIMPLE IRA has been established for at least two years.

A Designated Roth Account (DRAC), which is part of a 401(k), 403(b), or 457(b) plan, can only be rolled over into another DRAC or a Roth IRA.  Likewise, a Roth IRA is only eligible to be rolled over into another Roth IRA.

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Mortgage Debt Forgiveness and Taxes

Mar 12th, 2012
by jblankenship.
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When you have a debt canceled, the IRS considers the canceled debt to be be income for you, taxable just like a paycheck.  There are cases where you don’t have to include all of it though, and mortgage debt forgiven between 2007 and 2012 may be partly excepted from being included as income.

The IRS recently issued their Tax Tip 2012-39, which lists 10 Key Points regarding mortgage debt forgiveness.  Below is the actual text of the Tip.

Mortgage Debt Forgiveness: 10 Key Points

Canceled debt is normally taxable to you, but there are exceptions.  One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:

1. Normally, debt forgiveness results in taxable income.  However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision.  In some cases, however, other tax relief provisions – such as insolvency – may be applicable.  IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender.  By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully.  Notify the lender immediately if any of the information shown is incorrect.  You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.

You can also use the Interactive Tax Assistant (ITA) available on the IRS website to determine if your canceled debt is taxable.  The ITA tax you through a series of questions and provides you with responses to tax law questions.

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Posted in: 2008 Tax Year, 2009 tax year, 2010 Tax year, 2011 tax year, 2012 tax year, income tax, irs, mortgage debt.
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Calculating the PIA

Mar 9th, 2012
by jblankenship.
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WOMEN'S HISTORY MONTH

WOMEN'S HISTORY MONTH (Photo credit: mademoiselle louise)
WOMEN’S HISTORY MONTH (Photo credit: mademoiselle louise)

In determining your retirement benefits from Social Security, as well as those of any dependents who may claim benefits based upon your record, the Primary Insurance Amount, or PIA, is an important factor.  The PIA is the amount of benefit that you would receive if you began receiving benefits at exactly your Full Retirement Age, or FRA. (see this article for information about determining your FRA).

The PIA is only one of the factors used in determining the actual amount of your retirement benefit – the other factor being the date (or rather your age) when you elect to begin receiving retirement benefits.

So, how is PIA calculated?

There are several factors that go into the calculation of the PIA.  You start off with your Average Indexed Monthly Earnings (AIME – which we defined in this article about the AIME).  Then, we take into account the bend points for the current year.  For 2012 the bend points are $767 and $4,624.  Here’s the calculation:

  • the first $767 of your AIME is multiplied by 90%
  • the amount between $767 and $4,624 is multiplied by 32%
  • any amount in excess of $4,624 is multiplied by 15%

Note: these are the figures for 2012.  Each year the bend points are increased slightly (or most years they are), and so the PIA calculation may change.

So let’s work through a couple of examples:

Our first retiree is age 62 in 2012, and is hoping to begin taking Social Security benefits immediately upon eligibility – to get what’s coming to her.  Her AIME has been calculated as $6,500.  Applying the formula, we get the following:

  • first bend point: $690.30 ($767 * 90%)
  • second bend point: $1,234.24 ($4,624 – $767 = $3,857 * 32%)
  • excess: $281.40 ($6,500 – $4,624 = $1,876 * 15%)
  • For a total PIA of: $2,205.90 ($690.30 + $1,234.24 + $281.40)

The second example retiree also is age 62 in 2012.  His AIME has been calculated as $4,000.  Applying the formula:

  • first bend point: $690.30
  • second bend point: $1,034.56 ($4,000 – $761 = $3,233 * 32%)
  • excess: $0
  • For a total PIA of: $1,724.80 ($690.30 + $1,034.56)

You should note that the PIA is always rounded down to the next multiple of $0.10.

And that’s it.  As mentioned, your PIA is the basis for all of your other benefit calculations. For more information, you can pick up A Social Security Owner’s Manual.

 

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Posted in: primary insurance amount, social security, social security benefits, Social Security spousal benefit, social security survivor benefits.
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The Rollover

Mar 7th, 2012
by jblankenship.
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A Chevrolet Malibu involved in a rollover crash
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You’ve heard it millions of times – on the radio or tv – “when you leave your job, you should roll over your retirement account”. You may know that it makes sense (or at least you assume it makes sense, otherwise why would these folks admonish you to do so?), but do you know why it’s important? And do you have the first clue as to how to accomplish a rollover?

Why rollover? Among the reasons that it is important to rollover your retirement account when you leave employment is that you want to have control over your money. If you leave the account with the former employer, you are effectively handing over a portion of the control of your money to the administrator.

This administrator’s primary job is to ensure that the plan remains as effective and efficient as possible, for your former employer. Your interests are not taken into account at all, and in fact, many activities that the administrator undertakes (and subsequently charges the cost of to the plan accounts) are of no benefit to you whatsoever, as a former employee. By rolling your funds over to a self-directed IRA, you can make sure that the costs associated with your account’s maintenance are directly benefiting your own account.

In addition, by rolling over your retirement funds into an IRA, you now have more flexibility in the investment choices that you can utilize. Remember how your employer’s qualified plan only had five or ten mutual funds to choose from? Now, you can invest in just about any fund, stock, bond, or ETF available in the marketplace, plus some that you can dream up on your own.

How to roll over? We’ve covered (albeit briefly) the “why”, so now we’ll cover the “how”. It’s actually pretty simple, as long as you follow a couple of important rules. Both of these are related to maintaining the tax-deferred nature of your investment.

The first rule is that you should always have an account set up to receive the monies before requesting the withdrawal from your current plan. If you don’t have a place to put the money, the plan administrator will assume that you’re taking a “cash out” distribution, and they’ll withhold 20% tax on the withdrawal. The way to resolve this is to ensure that your withdrawal paperwork (with your old account) indicates a “direct rollover” is occurring. At the same time, your deposit paperwork with your new account will indicate the same. The old plan administrator may still send a check to your home address, but it will be made out to the new account custodian.

The second rule is related to the first, but this is one that you can foul up even if you’ve gotten the paperwork filled out correctly: your rollover must occur within the span of 60 days, or you’ll be penalized as if you withdrew the money to cash out the plan – 10%, plus ordinary income tax on the withdrawal.

As I indicated earlier, the current (old) plan administrator may send you a check for your rollover, made out to the new custodian – but it’s up to you to make sure that you get the check sent to the new plan custodian as soon as possible, so that there’s no danger of taking more than 60 days to complete the roll over.

The entire process is simple enough, following the steps below:

1. establish your new account
2. request a “direct rollover” withdrawal from your old plan
3. receive the rollover check
4. submit the check with the appropriate “direct rollover” deposit slip at your new account.

As you can see, the process is straightforward, but if you don’t pay close attention to what’s going on, or if one of your plan administrators (either the new one or your old one) has a special “twist” to the process, it can become a mess.

Note: steps 3 and 4 are not required if the transfer is done in a trustee-to-trustee manner, meaning that the old account administrator sends the funds directly to the new account trustee, and you never see a check.  This is one of the most common ways to ensure that you don’t miss the 60-day window. For more information, see An IRA Owner’s Manual.

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